Potential Impacts of Policy Proposals in the Next Trump Administration
by Stephen Kyne, CFP
Sterling Manor Financial
Where are you on a scale of jubilant to despondent? Hopeful? Trepidatious? Regardless of your desired outcome, the election is over, and we’re all on the same bus now. It’s time to take measure of where we are so that we can try to understand where we may be headed.
Understand that this article is only intended to view the outcome from a purely economic perspective, and is not intended to be political in any way.
Campaigns are filled with rhetoric and bluster. The first order of business for markets and their observers will be to try to understand which policy proposals were bluster, and which will actually go on to become governing priorities for the new Trump administration. Let’s review a few and how they could impact your wallet.
Tariffs have been a buzzword for much of the last year, with many people not fully understanding much about how they work. Tariffs are simply a tax on imports, which are always passed on to the consumer, leading to higher prices.
One proposal has been to repeal the income tax and fund the government entirely through tariffs. There are a few major reasons this is a non-starter.
First, it would be hugely regressive. Half of workers pay no federal income tax (not to be confused with Medicare and FICA). Because tariffs are effectively a tax on consumption, and because lower-paid workers spend a higher proportion of their income, and rely more heavily on inexpensive imports, their tax rate would effectively increase from zero to whatever their average tariff is (20-35% as proposed). Conversely, someone making a million dollars annually may only spend half of that, of which only a portion is on imports, so they may see their effective tax rate actually decrease to less than 10%.
Second, the US imports roughly $3.8T worth of goods and services. The Federal budget for 2024 is nearly $6T. Funding the budget would require a158% average tariff, meaning that prices on imports would need to go up by 158% on average. An increase of that magnitude would dramatically reduce consumption which, in turn, would require even higher tariffs to fund the gap, which would drive consumptions even lower; you can see that this death spiral becomes untenable. Repealing the income tax is almost certainly a non-starter.
The latest proposal is for a 25% tariff on imports from Canada and Mexico, and a 35% tariff on imports from China. These three countries account for nearly 45% of goods and services imported to the United States.
Tariffs of any kind will increase prices, so consider that everything you purchase from these countries will go up in price by 20-35%.
By providing inexpensive imports, Wal-Mart made it possible for working-class families to live a middle-class lifestyle, and it’ll be those families that will experience the worst of the inflation. I’m old enough to remember two years ago when the dollar store raised its prices a few nickels and it was the end of all things. Imagine what will happen when families that are already stretched thin see their cost of living go up again.
Moving on to immigration. It’s fair to say that the US’s immigration system needs to be improved, but the wholesale collection and deportation of undocumented workers will not only be expensive in its own right, but would have inflationary impacts across the economy.
Imagine what happens to the price of food when you remove the one-in-eight agricultural workers who is undocumented. Imagine what happens to the price of housing when you remove the nearly one-in-six construction workers who is undocumented. Imagine what happens to the cost of dining or your next hotel stay without the scores of undocumented workers who cook meals, wash dishes, and clean rooms in the hospitality industry.
Some will say that removing undocumented workers will create jobs for Americans, but with an economy at nearly full-employment there simply aren’t enough American workers to fill those vacancies. That means an increase in wages to attract them from other sectors, which will be passed on to the consumer, or a degradation in available services.
Then there’s RFK Jr., who would like to eliminate seed oils, and replace them entirely with beef tallow. Never mind that a sizeable chunk of the population does not consume beef due to dietary or religious constraints, eliminating seed oils would drastically increase the price of much of the food we consume.
Cows are far more expensive to cultivate than canola or sunflowers, and those costs would be passed on to the consumer which will have the greatest impact on low and middle-income families. The US cattle herd is already smaller than it’s been since 1961, and shorter supplies also mean higher prices
These domestic policies could be fairly easily reversed by this or the next administration, or by Congress. Of greater concern, to us, are the foreign policy priorities which could have more long-standing impacts.
The writing is on the wall that the US’s support of Ukraine will be waning. How that support is withdrawn could have serious consequences. If the US pulls support overnight, and cedes the Ukraine to Russia, then that may imply weakened resolve to China vis a vis its conquest of Taiwan. In the event China invades Taiwan, as it has signaled it would, expect that the Taiwanese will not go down without a fight.
Among other things, Taiwan currently produces 60% of the world’s semiconductors, and more than 90% of the world’s most complex semiconductors. Recall four years ago the disruption that was caused when the world couldn’t get semiconductors simply because these factories were shut down due to the pandemic. Now, imagine what will happen when those factories are reduced to rubble. The impact on global trade would be immediate and, you guessed it, wildly inflationary.
An isolationist America would almost certainly embolden China, Russia, and other adversaries, which could force our allies around the world to divert more resources toward their defense sectors, and away from other areas of their economies. This would result in lower output and higher prices.
With inflation running a very cool 2.6%, unemployment at an enviable 4.3%, GDP an impressive 3%+/-, and US stock indices at all-time highs, the US economy is very much the envy of the world. That isn’t to say things are perfect but, with the exception of a much needed reduction in government spending, status quo may be the best policy. Otherwise we may find prices soaring, the world on its ear, and a whole lot of uncertainty on the horizon.
More will become clear as governing priorities emerge and markets adjust. Be sure to work closely with your Certified Financial Planner® professional to help navigate the waters ahead.
Stephen Kyne CFP® is a Partner at Sterling Manor Financial, LLC in Saratoga Springs. This article contains forward-looking statements based on information available at the time of writing, and which are subject to change and not guaranteed.
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